Health as Human Capital and its Impact on Economic Performance

Abstract

Health is a key component of an individual’s welfare and standard of living. Sickness and ill health, and the risk of death, are central issues in shaping human capabilities and behavior. There is therefore a strong argument for health spending on the grounds that it has a direct effect on human wellbeing and happiness. The market for health is special and the provision of health often requires a large element of involvement by government. Infectious diseases have obvious externalities that create a large public interest in their control. In addition, the uncertainty of the occurrence of ill health, and the large medical bills that it may lead to, creates a need for insurance or borrowing to finance health expenditures. However, market failure is common in health, insurance and credit markets, often due to differences in information between the market provider and the customer. Government regulation and intervention in health, in an effort to overcome these market failures, is widespread. When individuals purchase goods they make a trade-off between the benefits they receive and the cost of the good. One drawback of government provision is that it must decide on the right level of spending on health, though it often lacks direct knowledge of health benefits. In developing countries the most effective methods of improving health require public sector involvement. In developing countries the main cause of ill health and premature mortality are infectious diseases. These can be tackled effectively through the provision of clean water and sanitation systems and wide scale vaccination programs. Such preventative public health measures can have a very large impact on the transmission of infectious disease, in many cases leading to the eradication of the disease. However, developing countries have limited budgets and there are many sectors in which there is a need for government spending. In particular, there is a strong case that poorer countries should concentrate their government spending on investment that leads to economic growth; spending on current consumption may lead to welfare gains today but does nothing to cure the long-term problems of poverty. Government spending on education, transport and communication infrastructure, and on legal institutions that ensure personal security and property rights can be shown to have a positive impact on economic growth. It can be argued that spending on health delays such investments and so hampers economic growth.